Modernizing California's Tax System for Equity and Logic

Excerpt: California Tax Expenditure Report

California's tax system has a few longstanding weaknesses including volatility in its income tax and a sales tax system designed for the early 20th century economy. Also, like the federal government and other states, California has special deductions and exclusions in its income tax system that provide oversized breaks (subsidies) and upside down benefits to high income taxpayers. Upside down refers to a situation where if the government wanted to, for example, use funds to help taxpayers pay for something like housing or health insurance, they likely would provide higher payments to lower income individuals than higher income ones on the premise that the lower income individuals need greater assistance. However, when the assistance is provided in the income tax without any phaseout as income increases, higher income taxpayers get a bigger subsidy because their higher bracket provides a greater tax savings.

I had two short articles published this month that describe equity and logic issues with California's tax system and offer a few suggestions for improvement.

1. State tax law opportunities to address inequality - published in the Joint Venture Silicon Valley blog (11/6/24).

2. Apple Settlement Shows Why California Needs a Sales Tax Overhaul - published in Bloomberg's Tax Insights & Commentary (11/14/24)

I have been writing about these topics since I started this blog back in 2007 and they are not getting better.  Encouraging broader understanding of the issues, possible improvements and how they can benefit many individuals as well as the economy, can hopefully encourage people to ask lawmakers to work on legislative improvements.

What do you think?

Disaster Relief and Administrative Convenience

Severe storms have been ongoing in many parts of California since December. I have two family members with severe damage to their homes causing them to have to move out for repairs. And I know many others also suffered significant damage to property.

FEMA and the IRS responded with relief. The IRS has now issued three announcements of which of the 58 counties in California get a postponement of filing and payment and for what periods - generally, if eligible based on county of residence, filing and payment (such as for 2022 returns) is now October 16, 2023.

Each of the three announcements lists mostly the same counties, but the lists are not identical nor the start date. But after these three casualty relief notices, just three of 58 counties in California don't get filing and payment relief - unless their records are in a county that gets relief and they ask the IRS for the postponed filing and payment date.

Well, California has a population of 39.2 million. The population of the three counties not included in relief are:

  Lassen - population 31,000

  Modoc - population 8,700

  Shasta - population 181,000

These counties represent less than 1% of California's population.

Some of the individuals and businesses in these counties may have activities or tax assistance in a covered county so will need to call the IRS to get the filing and payment postponement relief. 

But, given the small number of people and probably small number of businesses in these three counties, why not just extend relief to all of California? That should make it easier for the programming adjustment for IRS computers regarding California filers, and eliminate the need for anyone in these counties to have to ask the IRS for relief because records are in an affected county.

I think that adjustment would fall under administrative convenience. Too bad there isn't a good data analytics tool that could have quickly highlighted to the IRS that their relief notices were covering about 99.5% of California - so why not cover it all.

Another point is that while many had damage, I suspect most people did not. The payment extension for 39 million individuals and hundreds of thousands of businesses, even if 60% of individuals are getting refunds rather than making payments of 2022 taxes, will likely have a noticeable affect on tax coffers. Why not include a note in the relief messages that the government encourages everyone to pay on the regular due date if possible to avoid the need for the government to cover the shortfall for a few months.

What do you think?

Tax Implications of California's Vax for the Win Program

On May 27, 2021, California Governor Newsom’s “Vax for the Win” program with awards to vaccinated and to be vaccinated Californians provides:

• $1.5 million to each of 10 individuals
• $50,000 cash prize for 30 individuals
• $50 gift cards to the first 2 million individuals vaccinated on or after May 27; prize not awarded until vaccination series is completed.

The total cost is $116.5 million.

So, what are the tax consequences?

Accession to wealth, clearly realized so taxable (§61, §74, and Glenshaw Glass, 345 US 426 (1955)) unless an exclusion applies.

Since there are no income limitations for winning, the general welfare exclusion does not apply [see Info Letter 2019-0024]. This doctrine applies to exclude certain government payments when:

1. Paid per a government program
2. For promotion of the general welfare (based on need)
3. Are not payments for services

The prizes are not tied to the California tax system so they are not a tax credit (as the Golden State Stimulus Payments of $600/person are labeled in SB 88. Also, we are unlikely to see any federal legislation creating a special exclusion.

Query: Are the prizes a “qualified disaster relief payment” under §139(b)(4) – “if such amount is paid by a Federal, State, or local government, or agency or instrumentality thereof, in connection with a qualified disaster in order to promote the general welfare”? This term is not defined in §139 and there are no regs. Per JCX-93-01 on P.L. 107-134 (1/23/02): “Qualified disaster relief payments also include amounts paid by a Federal, State or local government in connection with a qualified disaster in order to promote the general welfare. As under the present law general welfare exception, the exclusion does not apply to payments in the nature of income replacement, such as payments to individuals of lost wages, unemployment compensation, or payments in the nature of business income replacement.”

In Notice 2002-76 with Q&As on the application of then new §139 regarding some 9/11 governmental payments, the IRS provided: “Section 139(b)(4) codifies (but does not supplant) the administrative general welfare exclusion for certain disaster relief payments to individuals.” Similarly, see Rev Rul. 2003-12. This exclusion is based on need.

Assuming the prizes are not excludable under §139, will withholding be required for any of these prizes? Per IRC §3402(o) and (q) and regs, probably not. The $50 gift cards to newly-vaccinated individuals might be viewed as issued for wagering but the amount paid is too low to require withholding. Since the first 2 million vaccinated in the stated time period get a gift card, the only gamble seems to be whether you’ll be in that group of two million. The prizes available to those already vaccinated should not require any withholding. Example 9 at Reg. 1.3402(q)-1(f) involves a magazine subscriber automatically entered into a sweepstakes who paid just the normal subscription price and has not placed a wager or entered a wagering transaction. So, there was no withholding  required for the $50K prize the subscriber won.

Observation: The recipients of the $1.5 million prizes (and even the $50K ones) should be offered and encouraged to have federal and California withholding taken from the prize. The terms and conditions do make a reference to tax withholding (perhaps that is just for California?).

Observation: If the winner is under age 18, they apparently can still get the $50 card with the parent’s assistance. But for the larger prizes, the terms and conditions state: “If a winner is a minor, the prize funds will be invested in a savings instrument and the minor will be able to access the funds upon achieving the age of majority. Additional conditions and details about administration of prizes paid to minors will be available before the first drawing.”  The fact sheet says the cash will be put in a savings account until they turn 18.

This raises some interesting accounting method rules (particularly the economic benefit doctrine and constructive receipt rule)! In Pulsifer, 64 TC 245 (1975), winnings from the Irish Sweepstakes were irrevocably deposited to a bank account for a minor for his benefit until reaching age 21. The funds were taxable when won. If instead, the state or other agency is the holder of the winnings until the minor reaches age 18, they likely are not taxable until received later. PLR 9624009 and PLR 200031031 have detailed discussion of this regarding lottery winnings.

The kiddie tax is also relevant if the child is under age 18 or is a full-time student age 19 to 23.

What if the winner declines the prize? The terms and conditions for these vaccine prizes allow this. Will the winner be treated as having income and then a donation to the state of California when they give the prize back?  This is not exactly a wash for taxable income (income less charitable donation) because the high AGI will exclude the individual from many tax rules that phase out at certain high AGI levels. Since the winner is selected without any action on their part to enter the contest, §74(b) should treat the amount as not taxable if transferred to a government or charity immediately. But refusing the prize should make it non-taxable per Rev Rul 57-374. The full text of this old ruling: “Where an individual refuses to accept an all-expense paid vacation trip he won as a prize in a contest, the fair market value of the trip is not includible in his gross income for Federal income tax purposes.”

California: Tax treatment will be the same as federal unless the state enacts an exclusion, which I think is unlikely.

Tax Policy: These prizes are unexpected accessions to wealth and should be taxed. That is, no exclusion should be enacted in California and certainly not at the federal level (no need for non-Californians to subsidize these prizes). While excluding a $50 gift card might seem administratively convenient per person, the aggregate award is $100 million and perhaps 5% average tax – so a lot of revenue. And many recipients may be below the filing threshold and some may be in the highest tax bracket. And, of course, since taxable at the federal level, the federal government will get a portion of these awards.

What do you think? (of these awards and taxation)

Two New Sales Tax Exemptions in California for Two Years

California SB 92 (Chapter 34, 6/27/19) adds two new sales tax exemptions starting 1/1/20 and ending 12/31/21:

1. “diapers designed, manufactured, processed, fabricated, or packaged for use by infants, toddlers, and children” [R&T 6363.9]
2. “menstrual hygiene products” shall only include the following: (1) Tampons. (2) Sanitary napkins primarily designed and labeled for menstrual hygiene use. (3) Menstrual sponges. (4) Menstrual cups.” [R&T 6363.10]

For these new temporary sales tax exemptions, the legislature applies R&T §41 dealing with accountability. Thus, the legislature had to specify the purpose of the exemptions and require a report from the LAO on the effectiveness of these provisions including whether they should be modified, extended, or allowed to expire. For the diaper exemption, the LAO is also to assess “whether more targeted approaches to providing families in need with adequate access to diapers are available.” For the menstrual products, the LAO is also to assess “whether more targeted approaches to providing individuals in need with adequate access to menstrual hygiene products are available.” The specified goals of these exemptions:

·         Diapers: “to promote public health by increasing the affordability of, and expanding access to, diapers.”

·         Menstrual hygiene products: “to promote public health by increasing the affordability of, and expanding access to, menstrual hygiene products.”

Observation: Often, bills that provide a new credit or exemption state that R&T §41 does not apply. Then there is no need for accountability as to whether the provision meets its purpose or even that a purpose be articulated. Important to this assessment though is whether the LAO will have the information needed for a strong assessment. The legislation should have included a provision and funding to have the LAO identify information it will need the CDTFA to collect.

Other states provide similar exemptions with the sales tax on menstrual products sometimes referred to as the pink tax or the tampon tax. States with an exemption include Connecticut, Florida, Illinois, Minnesota, New Jersey and New York.

Do these exemptions reflect good tax policy? NO. The biggest issue is equity and fairness in that they give the largest break to higher income buyers because they are likely to spend more on diapers. I see that on Amazon, diapers range from 11 cents/diaper up to at least 49 cents/diaper. Someone already buying the more expensive diapers doesn't need a sales tax break to make diapers more affordable as they have already opted to not buy a less expensive diaper that would be more affordable. If the exemption were only given to individuals who need it and who may need even more assistance in paying the price without the sales tax, this exemption is poorly targeted.  A similar argument can be made for the menstrual products.

There are better ways to target relief to taxpayers needing relief rather than also giving relief to those who don't need it. This sales tax break results in reduced revenue for state and local governments. How will they make it up?

More targeted relief would be to provide diaper coupons to individuals already receiving state or local aid, or just giving them diapers which the state would buy in bulk at a reduced cost. Same with menstrual products.

Another concern with these products is that there are added environmental costs of these disposable items. Thus, removing the tax on them means that the costs of disposal and filling up landfills needs to come from elsewhere.

What about the argument that only females need menstrual products so taxing them is a gender disparity. That same argument can be made for other products such as razors, shaving cream, jock straps, football helmets, and I'm sure other items. Exempting these items makes the system more complex, less equitable, and requires that the rate be higher on other items.

The California Legislative Analysts Office issued a report (5/12/19) on these exemptions before enactment of S 92. It notes a few additional issues including the difficulty of defining a "necessity" and whether an income tax credit for the menstrual products would present greater tax relief.

What do you think?

State Reactions to Wayfair Decision

UPDATED 9/30/19  [I do my best to keep it up to date, but there likely are omissions. Also see the very helpful State-by-state guide to economic nexus laws from Avalara for more updated list.]
What are some states saying about the U.S. Supreme Court's decision in South Dakota v Wayfair, et al [see my 6/22/18 post for more on the case]

Here is news from several states. I don't think most states will strive to collect below the thresholds of the South Dakota law, but you never know. I think we'll hear from more states by early 2019 and perhaps even from a few members of Congress. I'll continue to update this post.

States in bold are full members of the Streamlined Sales and Use Tax project. The SSUTA scheduled an emergency meeting of the SSUTA Board for July 19-20 to discuss the Wayfair decision. Agenda items included use of the Central Registration System and the Certified Service Provider system by non-members.

Also look for what applies for local governments, particularly in Alabama, California (see below), Colorado, and Louisiana.

Also, on 6/29/18, the National Conference of State Legislatures released its Principles of State Implementation after South Dakota v. Wayfair. This 1-page document suggests that states be prepared before more broadly enforcing tax collection and wait  until 1/1/19 to start collecting. It also includes suggestions for states that that have not adopted the Streamlined Sales and Use Tax Agreement (SSUTA).

• Alabama - The Dept. of Revenue released a statement on 7/3/18 that reminds readers that the DOR issued economic nexus sales tax rules in 2016. Per the DOR, these will be applied prospectively starting for sales made after 9/30/18, even though the rules were effective 1/1/16. The threshold for economic nexus under the rules is annual sales in the state above $250,000, The statement also notes the state's marketplace facilitators law also for sales exceeding $250,000. These facilitators must collect sales tax on sales of its third-party sellers or comply with the reporting and customer notification rules. Also see HB 470 enacted in April 2018 extending collection to marketplace facilitators and Reg 810-6-2-.90.03.
• Alaska - There is no state sales tax, but some of the cities impose sales/use tax. The City of Nome amended its Ordinance No. O-19-08-01 (8/26/19) to clarify when remote sellers and marketplace facilitators have collection obligations.
• Arkansas - SB 576 (Act No. 822; 4/10/19) - imposes marketplace facilitator collection obligations if deliveries to state exceed $100,000 or 200 transactions.
  
  DOR FAQs for Remote Sellers. Also see 
• DOR website for Remote Sellers
• Opinion No. 20190501 (8/29/19) - states that the threshold is based on taxable sales (not also sales for resale, for example). But notes that the seller needs to retain appropriate records if making exempt sales in the state,
• Legal Opinion No. 20190702 (8/9/19) on application of the nexus threshold and sales/use tax to a direct mail marketer.
• Revenue Legal Counsel memo 9/9/19
• Arizona - HB 2757 (5/31/19) requires marketplace facilitators to start collecting on 10/1/19 if they have over $100,000 of sales. Remote seller must collect if in the prior year or current year to date, they have over $200,000 of direct sales into Arizona. For 2020, this threshold drops to $150,000 and to $100,000 for 2021 and thereafter. See DOR website for out-of-state sellers + Registration under new rules for remote sellers and marketplace facilitators (starting 10/1/19)/
• California - This is one of the states that already had broad language in its statute that with the repeal of Quill, likely allows the state agency (California Department of Tax and Fee Administration (CDTFA)) to start collecting from remote vendors with over $100,000 of sales in the state or 200 or more transactions. I say "likely" because while California Revenue & Taxation Code Section 6203(c) provides that retailer in the state includes "any retailer that has substantial nexus with this state for purposes of the commerce clause of the U.S. Constitution," is the $100,000 receipts or 200 transaction threshold enough for the state? The U.S. Supreme Court noted three aspects of the SD law that supported nexus within commerce clause parameters (see page 23 of the opinion): (1) safe harbors of the $100,000 receipts or 200 transactions, (2) no retroactive application, and (3) SD belongs to the SSUTA which requires states to offer free software for compliance and audit protection if used, as well as standardized definitions and other administrative benefits. While the CDTFA can offer (1) and (2), it can't easily offer (3). That would likely take some additional appropriations. In fact, given the size of California, its customer base likely supports many remote vendors who meet the safe harbors of the SD law. Can the CDTFA handle all of the new registrations and support that would be needed without an allocation of more funds? Also, might the legislature of this state that is home to eBay, want to raise the safe harbor thresholds?  And, how important is (3)? Are factors (1) and (2) enough?
  
  Hearings: On 10/15/18, the Senate and Assembly taxation committees held a joint information hearing. On 10/24/18, the CDTFA held an informational hearing on Wayfair.
  
  CDTFA Action: On 12/11/18, the CDTFA announced that it would follow the SD thresholds as measured in the prior or current calendar year, starting 4/1/19 (Special Notice L-565 (Dec. 2018)). Also, in-state sellers must apply the Wayfair standards to determine if they must collect district taxes anywhere they ship in California and are not already collecting in that district (such as because they don't have a physical presence there) (Special Notice L-591 (Dec. 2018)). Also see CDTFA website and FAQs - here.
  
  AB 147 Enacted (Chapter 5, 4/25/19) - this makes significant changes to the CDTFA action including that the transaction quantity standard is removed, the sales threshold is increased to $500,000, a marketplace facilitator collection requirement is added (starting 10/1/19) and a vendor with over $500,000 of sales will also have to collect the district level tax (the local tax beyond the state rate of 7.25%) regardless of the amount of sales in a district. The new thresholds apply starting 4/1/19. Also see CDTFA Notice L632. Also see CDTFA proposed amendment to Reg 1684 for the new changes.
  
  CDTFA Wayfair website - lots of info!
  
  CDTFA guidance for marketplace sellers and facilitators. Note that these changes also affect in-state sellers who sell via a marketplace facilitator.
• Special Notice L-694 (Aug. 2019)
• Special Notice L-700 (Aug. 2019)
• Tax Guide for Marketplace Facilitator Act (MPFA; starts 10/1/19) + see the FAQs
• Colorado - See new website links here. Tax collection for remote sellers starts 12/1/18. Sellers meeting the new nexus thresholds are to register by 11/30/18. The thresholds are the same as for South Dakota. More info - In-State Retailers + Out-of-State Retailers.
• Connecticut - SB 417 (Public Act 18-152; 6/14/18) modifies the states economic nexus for sales tax for remote vendors to having at least $250,000 of retail sales in the state and 200 or more transactions, effective 12/1/18. Also see Dept. of Revenue Services Special Motice (5.1) explanation of the law change related to Wayfair, as well as the explanation of the marketplace facilitator law change.
• District of Columbia (DC) - B22-0914 (Act No. A22-0584; 1/18/19) adopts the SD thresholds. The revenues generates are to be used to lower commercial property tax rates. Also see DC's Office of Tax and Revenue website on sales tax.
• Georgia - At 1/1/19, follows an economic nexus standard of over $250,000 of sales into the state in the prior or current calendar year or 200 or more separate retail sales of tangible personal property. Alternatively, the vendor must issue a notice to the buyer and state. See HB 61 (Act 365, 5/3/18). Click here for more information from the Georgia Dept. of Revenue.
• Hawaii - Prior to the Court's decision, Hawaii enacted SB 2514 (Act 41, 6/13/18) to match the South Dakota law, effective 7/1/18, but applying to tax years beginning after 12/31/17. In Announcement No. 2018-10 (6/27/18), the Dept. of Taxation stated that it had been unclear when its general excise tax (GET) applied when a seller did not have a physical presence in the state. Act 41 though, provides clarification. Starting 7/1/18, taxpayers must obtain a GET license and file returns and remit the GET if for the current or prior year the taxpayer had gross income or proceeds of $100,000 or more, or 200 or more separate transactions from tangible property delivered in Hawaii, services used or consumed in Hawaii or intangible property used in Hawaii. Thus, Hawaii started with an effective date (retroactive) of 1/1/18 (that is, a vendor could have crossed the requisite threshold in 2017 making it subject to collection starting 2018). However, on 7/10/18, the Dept.of Taxation announced that because the Supreme Court noted that SD law was not retroactive, to avoid constitutional challenge, Hawaii will not apply its law to sellers who lacked physical presence prior to 7/1/18 (see amended announcement).
  
  SB 495 (Act 221, 7/2/19) adopts the sales tax threshold to also be the nexus threshold for state income taxes for businesses that don't have a physical presence in the state, effective for tax years beginning after 12/31/19. Observation: A state cannot override P.L. 86-272 which still applies to possibly limit nexus if a taxpayer has not physical presence other than sales personnel who solicit orders that are approved and shipped from out-of-state.
• Idaho - The State Tax Commission issued an explanation on 8/15/18. Remote retailers must collect if they have an agreement with an Idaho retailer to refer buyers to the remote seller for a commission on the sale, and total sales to in-state buyers due to such agreements exceeds $10,000 in the prior 12 months. This is the state's "click through" nexus rule. The announcement states that the Tax Commission is "carefully analyzing" how the Wayfair decision affects remote sellers.
  
  HB 259 (enacted 4/9/19; Chapter 320), effective 6/1/19 - internet retailers and marketplace facilitators to collect and remit sales and use tax. See summary in summer newsletter of the State Tax Commission.
  
  State Tax Commission's guide for online sellers + Tax Update for Summer 2019.
• Illinois - Enacted HB 3342 (Public Act 100-0587)on 6/4/18. Article 80 includes a “marketplace fairness” provision providing that a vendor is considered a “retailer maintaining a place of business” in the state if it makes sales of tangible personal property to buyers in the state, from outside of the state and have cumulative gross receipts from sales of such property of $100,000 or more, or has 200 or more separate transactions for the sale of tangible personal property to Illinois buyers. The determination is made quarterly by looking 12 months back from the last day of March, June, September or December. If the criteria is met, the retailer must collect and remit sales tax for one year. At the end of that year, if the criteria continue to be met, collection continues. Effective starting 10/1/18.
• Indiana - Has an amnesty program through the end of 2018 for online vendors who should have been collecting such as because they have inventory in the state.  The DOR released a statement noting that on 6/21/18, Governor Holcomb said they were studying ruhe ruling "to better understand its implications for Indiana."
• Iowa - Prior to the Court's decision, Iowa enacted SF 2417 effective 1/1/19 which basically mirrors South Dakota law. On 6/25/18, the Dept. of Revenue issued an explanation and a reminder that if a vendor has physical presence and has not been reporting, it should consider the voluntary disclosure purposes. The new economic nexus law is prospective only (starting 1/1/19) including the requirement that marketplace facilitators meeting the SD threshold collect starting 1/1/19. For an example of how the expanded sales tax nexus can apply to a remote vendor, see the DOR's ruling in Fairytale Brownies, Inc., an Arizona-based company selling product into Iowa (Dkt No. 2018-300-2-0440; 12/7/18). The company's website indicates it collects tax on sales to Iowa customers starting 1/1/19.
  
  H 779 (5/16/19) - removes the 200 transaction threshold.
  
  Marketplace Facilitator law effective 1/1/19. See DOR's Food Delivery Services as Marketplace Facilitators.
  
  Regulations (8/8/19), effective 10/2/19, explains the Wayfair rules including definitions such as for remote seller, sales threshold
• Kansas - On 8/1/19, the Kansas Dept of Revenue released Notice 19-04, Sales Tax Requirements for Retailers Doing Business In Kansas. It states that after Wayfair, the physical presence standard no longer applies for sales/use tax. The DOR also notes that the state "imposes its sales and use tax collection requirements to the fullest extent permitted by law." It then states that all remote sellers who are not already registered to collect, must do so by 10/1/19. Because Kansas is part of the SSUTA, the notice states that sellers can register for all of the 24 SSUTA states at once using the online application system - http://www.sstregister.org. Or, they can register directly at the Kansas DOR site (thereby registering in just that state). Registering via SSUTA provides access to Certified Service Providers to assist with the filings; free to remote sellers. The notice also encourages marketplace facilitators to consider entering voluntary compliance agreements with the DOR.
  
  On 9/30/19, Kansas Attorney General Schmidt issued an 18-page memo indicating the DOR position is incorrect - that it "is of no force or legal effect because it was not lawfully adopted in compliance with Kansas law." Governor Kelly issued a memo in response indicating that the DOR rule serves to protect those doing business on "Main Street" in Kansas and the DOR position "simply reaffirms this tax fairness." Also see 9/4/19 14-page memo by Kansas Secretary of Revenue Burghart to AG Andaya.
• Kentucky - DOR news release on HB 487, which would adopt the South Dakota thresholds, effective 7/1/18.
• Louisiana – The Department of Revenue issued a statement on 6/21/18 that “it is far too soon for a definitive estimate of what the state will receive from online sales as a result of today’s decision, but when appropriate, we will provide updates.” Update: On 8/10/18, the DOR issued Remote Sellers Information Bulletin No. 18-001 on the impact of the decision. Legislation in 2017 created the Louisiana Sales and Use Tax Commission for Remote Sellers. The Commission will not seek to enforce collection on remote sellers for any period beginning before 1/1/19. The Bulletin also observes "there is no requirement in the Wayfair decision that states adopt the Streamlined Sales and Use Tax Agreement in order to meet Commerce Clause standards." Additional guidance will be released "as appropriate."
  
  DOR's Remote Sellers Information Bulletin No. 19-001 (5/17/19).
  
  Observation: The Supreme Court did note three features of SD law "that appear designed to prevent discrimination against or undue burdens upon interstate commerce." One of these features is that SD is a member of the SSUTA meaning it has some uniform definitions as well as provides software to vendors and audit protection if it is used. [case page 23]
• Maine - A 2017 law change (36 M.R.S. §1951-B(3); Chapter 245) adopted the SD thresholds. In a 10/1/17 newsletter, the Department of Revenue says the change is effective 11/1/17, but the legislation says effective once permitted per the U.S. Constitution. Also see tax agency's August 2018 release and website.
• Maryland - A undated Tax Alert from the Comptroller states reminds folks that Maryland law imposes sales tax collection obligations "as broadly as is permitted under the United States Constitution. It includes an interesting "figure it out yourself" statement: "If you sell or deliver tangible personal property or a taxable service for use in Maryland, you should review and analyze the United States Supreme Court's decision in [Wayfair] to identify how it affects you."
  
  In September, the state got more specific noting it would follow the South Dakota approach starting 10/1/18. Also see Tax Alert 09-19 on Marketplace Facilitators.
• Massachusetts – in a 6/22/18 news release, the Department of Revenue noted that its existing regulation 830 CMR 64H.1.7 (Vendors Making Internet Sales), effective October 2017 remains in effect and is not affected by the Wayfair decision. This regulation has also been referred to as the “cookie nexus” rule. This regulation includes the following:

“Unlike the mail order vendor at issue in Quill, Internet vendors with a large volume of Massachusetts sales invariably have one or more of the following contacts with the state that function to facilitate or enhance such in-state sales and constitute the requisite in-state physical presence. …”

a.  property interests in and/or the use of in-state software (e.g., “apps”) and ancillary data (e.g.,“cookies”) which are distributed to or stored on the computers or other physical communications devices of a vendor’s in-state customers, and may enable the vendor’s use of such physical devices;

b.  contracts and/or other relationships with content distribution networks resulting in the use of in-state servers and other computer hardware and/or the receipt of server or hardware-related in-state services; and/or

c.  contracts and/or other relationships with online marketplace facilitators and/or delivery companies resulting in in-state services, including, but not limited to, payment processing and order fulfillment, order management, return processing or otherwise assisting with returns and exchanges, the preparation of sales reports or other analytics and consumer access to customer service.”

The sales tax collection thresholds is over $500,000 of sales into the state AND 100 or more transactions in the prior calendar year. Also see the state's FAQs for before 10/1/19 and FAQs for 10/1/19 and later.

• Michigan - Per Revenue Administrative Bulletin 2018-16 (8/1/18), starting 10/1/18, remote sellers with both taxable and non-taxable sales into the state in excess of $100,000 or 200 or more separate transactions based on the prior calendar year, has nexus and must register and start collecting. No tax is owed prior to this date (unless they otherwise had nexus such as under the state's click-through nexus rule). If sales level later drop for a calendar year, the seller can stop collecting the next year. Also see FAQs on remote sales in light of the Wayfair decision.
• Minnesota – The Department of Revenue issued a news release on 6/21 stating that the Wayfair decision means that “states like Minnesota can require certain retailers with no physical presence, such as online sellers, to collect and remit the applicable sales or use tax on sales delivered to locations within their state.” The DOR also stated that they “will work with our customers to ensure fair, efficient, and transparent implementation of this decision. We will provide further guidance within 30 days. The department will work hard to provide our customers with the information and services they need to meet their sales and use tax obligations under Minnesota tax law in as smooth and efficient manner as possible.” The DOR expects to issue guidance within 30 days for vendors not presently collected sales tax from Minnesota customers. The DOR also observes that vendors who want to start collecting now can register to do so with Minnesota and the other 23 member states of the Streamlined Sales Tax System at https://www.sstregister.org/.  Also see update for marketplace providers and FAQs.
  
  In a 7/17 memo, the DOR noted it is hosting the emergency meeting of the SST Governing Board on July 19 and 20. Also, an announcement about sales tax enforcement for remote sellers and marketplace providers will by made on 7/25/18. The DOR also has a "red envelope" on its website where remote sellers can sign up to get emailed updates.
  
  A 7/25 memo from DOR states that remote sellers and Marketplace Providers that facilitate sales will be required to start collecting sales tax by 10/1/18. This memo includes links to the relevant law (297A.66) and some FAQs for remote sellers. Small remote sellers are exempt from collection if during the prior consecutive 12-month period they had less than 100 retail sales shipped to Minnesota and less than ten retail sales shipped to Minnesota that total over $100,000.
• Mississippi - The Department of Revenue stated in a 6/21/18 release that it is studying the Wayfair ruling to determine its effect in the state. "It is our belief this will create a more level playing field for Mississippi businesses that compete with online sellers." The DOR reminds sellers with out a physical presence in the state that existing state law requires those with sales in excess of $250,000 in the prior 12-month period to register and collect sales tax. Also see DOR "Sales and Use Tax Guidance for Online Sellers" updated for the Wayfair decision.
• Montana - Has a website explaining the effect of Wayfair on its residents and in-state businesses. Montana does not itself impose a sales tax. They suggest that in-state vendors "seek competent legal advice on how to proceed with collecting and remitting sales tax for sales tax states such as South Dakota."
• Nebraska - On 7/27/18, the DOR issued a news release with reminders to consumers to pay use tax when not charged sales tax, to certain remote sellers to check state law (Neb. Rev. Stat. 77-2701-13) to see if they must register to collect sales tax, and to in-state sellers that they may have new collection obligations in other states. State law includes affiliate ownership, and various in-state connections. It also includes that engaged in business includes soliciting orders in a "continuous, regular, seasonal, or systematic" manner where the "retailer benefits from any banking, financing, debt collection, or marketing activities occurring in this state or benefits from the location in this state of authorized installation, servicing, or repair facilities." Also see the DOR FAQs on the Wayfair decision. So, watch for any action by the legislature to adopt South Dakota-type legislation.
  
  LB 284 (signed 3/21/19) uses the SD thresholds and adds marketplace facilitator collection requirements. See text.
• Nevada - The Nevada Tax Commission released a draft regulation on 7/17/18 (R189-18) that basically adopts the SD threshold for a remote vendor to be subject to sales tax obligations in the state. A revision was released 8/9/18. See actions and timeline posted here.
• New Hampshire - Governor Sununu news release of 6/28/18 to fight the decision. Another press release of 8/23/18 lists executive actions underway including helping in-state businesses avoid scams where a thief posing as a state collector tries to get money or sensitive customer data from them. NH doesn't impose a sales tax.
  
  On 7/19/19, Governor Sununu signed SB 242 (Chapter 280) presenting an approach to try to fight other states imposing collection duties on NH sellers. The summary of this legislation states that it provides "for protection of private customer information and rights of New Hampshire remote sellers in connection with certain foreign sales and use taxes." SB 242 provides that other states must first provide notice to the NH Dept. of Justice before requesting private customer information, performing exams, or imposing sales and use tax collection obligations on NH sellers. A commission is established to monitor federal and state law changes and proposals regarding tax collection obligations on NH remote sellers. Section 2 of SB 242 takes effect 11/1/20 and the rest takes effect on 7/19/19. It is not clear from the text what "Section 2" is. See Governor Sununu news release on signing SB 242.
  
  See 8/29/19 explanation from the NH Dept. of Revenue. The state also has a website developed by the New Hampshire Department of Business and Economic Affairs, Division of Economic with additional information.Development
• New Jersey - legislation is pending. Also, on 8/14/18, the NJ Division of Taxation issued a notice that effective 10/1/18, consistent with the Wayfair decision, remote vendors meeting the SD thresholds in NJ must register and collect sales tax. FAQs.
• New York - Per the Dept. of Taxation and Finance website, a vendor is subject to sales tax collection if in the immediately preceding four sales tax quarters, their cumulative total gross receipts from sales of tangible personal property delivered into NY exceeded $300,000, AND the vendor made over 100 sale of tangible personal property delivered into NY. Also see N-19-1 (Jan. 2019) on sales tax registration for businesses without a physical presence in the state.
  
  S01509C and A02009-C (signed 4/12/19; Chapter 59) - adds marketplace provider collection requirement.
• North Carolina - Sales and Use Tax Directive 18-6 (8/7/18) - The DOR will apply the Wayfair decision prospectively starting 11/1/18. By "Court's ruling in the Wayfair decision," the DOR means application of collection obligations to remote sellers with gross sales exceeding $100,000 or 200 or more separate transactions in the prior or current calendar year. Such sellers must register 11/1/18 or 60 days after they meet the threshold, whichever is later.
  
  SB 56 (signed 3/20/19) adopts the DOR thresholds.
• North Dakota – The Tax Commissioner states that remote sellers must now follow ND’s law enacted in 2017 (SB 2298; 4/10/17) that is similar to that of South Dakota. At 6/25/18, the website states that it is a “work-in-progress” and more information will be added later.
• SB 2298 included a “contingent effective date” provision: “This Act becomes effective on the date the United States Supreme Court issues an opinion overturning Quill v. North Dakota, 504 U.S. 298 (1992), or otherwise confirming a state may constitutionally impose its sales or use tax upon an out-of-state seller in circumstances similar to those specified in section 1 of this Act.”
• SB 2191 enacted 3/14/19 removes the 200 transaction requirement effective for tax years beginning after 2018.
• SB 2338 enacted 3/27/19 imposes collection obligations on marketplace facilitators effective 10/1/19.
• Ohio - Dept. of Taxation memo on Substantial Nexus and Marketplace Facilitator Changes in light of HB 166 taking effect 8/1/19.
• Oklahoma - The State Treasurer's June/July 2018 Economic Report includes an overview of the Wayfair case. It also reminds readers that the effect of the decision is "not a tax increase, but a tax compliance issue." It also notes the benefit to cities, estimated at about $112 million annually. See Oklahoma Tax Commission's FAQs. The state's economic nexus rule goes into effect 11/1/19.
• Pennsylvania - Sales and Use Tax Bulletin 2019-01 (7/1/19) - Maintaining a Place of Business in the Commonwealth - basically, the state uses the $100,000 gross sales threshold and explains how that level applies for marketplace facilitators and marketplace sellers. Also see the DOR's sales tax, economic nexus and Wayfair website + information on marketplace facilitator rules.
• Rhode Island - The Dept. of Revenue issued an advisory on 6/27/18 to remind remote vendors of registration options. RI is a member of the Streamlined Sales and Use Tax System. The advisory doesn't state though which vendors need to register. Also see DOR Pub 2018-06 (7/6/18) with FAQs for remote sellers. DOR ADV 2018-29 (7/23/18) provides additional information for non-collecting retailers.
• South Carolina - On 8/10/18, the DOR released three draft rulings. Draft SC Revenue Ruling #18-x, Retailers Without a Physical Presence ("Remote Sellers") - Economic Nexus, effective for sales made on or after 10/1/18, sellers meeting a $250,000 economic nexus standard must register and collect sales tax. Draft SC Revenue Ruling #18-x, Online Marketplaces - Physical and Economic Nexus, provides information for marketplaces and sellers using them as well as the relevance of the litigation involving Amazon. The third ruling, Draft SC Revenue Ruling #18-x, Persons Using Another Person's Online Marketplace To Sell Their Products - Registration and Tax Collection Guidance. On 8/21/18, another draft ruling was released: Draft SC Revenue Ruling #18-x, Local Sales and Use Taxes and Catawba Tribal Sales and Use Tax.
• South Dakota - On 10/31/18, Governor Daugaard and Attorney General Jackley announced a settlement with Wayfair, Overstock.com and Newegg where these companies would start collecting sales tax on 1/1/19. Other remote vendors subject to the SD law were required to start collecting 11/1/19! See the Dept. of Revenue's website about the state's famous economic nexus law.
  
  Information on remote sellers and marketplace providers + FAQs.
• Tennessee - Sales and Use Tax Notice #18-11 (August 2018) states that its economic nexus rule is not enforceable until the General Assembly reviews the Wayfair decision. "However, the Department encourages these dealers to voluntarily collect and remit the tax as a convenience to their customers." The notice states that the economic nexus rule (Rule 129(2)) will not be applied retroactively.
• Texas - Comptroller Hegar announced 6/27/18 his office would study the situation with input from the public and lawmakers. He suggested there would be no retroactive application. STAR ruling 201807004L (7/5/18) summarizes the Wayfair decision, notes what the Comptroller is doing, and offer suggestions for the stat legislature. On 10/19/18, proposed rules were issued (see page 24, et seq). A threshold of over $500,000 of sales in a year is proposed with no transaction test. Also, once the seller crosses the threshold, it has three months before starting to collect. Vendors who cross the threshold now, start collecting 10/1/19.
  
  In November 2018, SB 70 was introduced calling for a single statewide local tax rate for remote vendors.
  
  See more news in the December 2018 Comptroller's newsletter.
  See Comptroller's website on Wayfair for sellers.
  
  Texas has proposed via a proposed regulation change from the Comptroller (August 2019) to use the same nexus threshold for its franchise tax. Because this is not a net income tax, P.L. 86-272 does not apply.
• Utah - SB 2001 enacted after the Court's decision in Wayfair, follows the South Dakota thresholds, effective for sales on or after 1/1/19. This new law repeals the 18% discount Utah had been offering to remote sellers who voluntarily collected the state's sales tax.
• Vermont - The Dept. of Taxes announced that the Court's decision makes Act 134 (2016) effective. That law is similar to that of SD affecting out-of-state vendors that made at least $100,000 or sales or 200 individual transactions in any prior 12-month period.
• Virginia - HB 1722 (Chapter 815; 3/26/19), effective 7/1/19 imposes the over $100,000 gross revenue or 200 or more separate retail sales transactions threshold, as well as marketplace facilitator collection obligations. SB1083 (Chapter 816; 3/26/19) effective 7/1/19 is similar and discusses liability relief for facilitator if collects wrong amount of tax.
  
  Guidelines for Remote Sellers and Marketplace Facilitators from DOT, effective 6/27/19.
• Washington - The DOR website notes that starting 10/1/18, the South Dakota threshold will apply. If the remote seller only sells through a marketplace facilitator, different rules apply. In addition, starting 1/1/18, remote sellers and marketplace facilitators with $10,000 or more in retail sales in-state must either register their business and collect sales tax or follow the use tax notice and reporting requirements. However, it cautions that any business meeting the SD thresholds must start collecting (and register) starting 10/1/18.
  
  SSB 5581 signed 3/14/19 removes the 200 transaction and just uses the over 4100,000 of sales for nexus.
• Wisconsin - The DOR website states that starting 10/1/18, remote vendors will have to start collecting sales tax from Wisconsin customers if they meet the new standards that match the SD thresholds. The website also has a set of FAQs. Also see DOR's Statement of Scope regarding work needed.  The Legislative Fiscal Bureau reports in a 7/2/18 memo that if the state changed its law to follow SD law, it would generate an additional $120 million per year. It also notes that state law likely needs to be changed to specify a threshold for "an electronic nexus threshold." The memo also notes that a law change in 2013 states that additional sales and use tax revenues generated from "any federal law" expanding the ability of the state to impose sales tax obligations on remote vendors is to be used to reduce income tax rates. 
• Wyoming - The DOR issued a memo reminding readers that the state has an economic nexus rule similar to that of SD. The DOR is studying the decision's "impacts" to determine a "date certain for licensing deadline." The rule will be enforced prospectively only. 

States with South Dakota type laws will need to issue guidance on the effective date and how to measure the $100,000 sales and 200 transaction thresholds (or other thresholds specified by the state). For example, do sales of tax-exempt items count?

Have you checked the existing sales tax nexus/jurisdiction law in states where you or clients have nexus per the South Dakota standard? As standards differ among states, some states have not yet said anything about their response to the Wayfair decision, and after the decision, e-commerce vendors are more likely to have new sales tax obligations. Such vendors should consider a system that enables them to track the number of transactions in each state and the dollar amount to better identify when new collection obligations arise or to consider not making certain sales if they want to reduce the number of states in which they have collection and filing obligations.

What do you think?

Yet One More Proposal for Relief of New State Tax Deduction Cap

The Tax Cuts and Jobs Act (PL 115-97; 12/22/17) limits the itemized deduction for state and local taxes to $10,000 ($5,000 if married filing separately). As with most of the individual tax changes including the lowered tax rates, this change only exists for 2018 through 2025.

Several states don't like this change, particularly states like New York, New Jersey and California with high state taxes. New Jersey enacted S 1893 on 5/4/18. It allows local governments to create funds where property owners can "donate" to the fund and get a 90% credit against their property tax. The federal benefit is that this is a charitable donation which shows up on the federal return as a charitable deduction rather than as a state tax deduction. Sounds like a good deal.  Too good to be true?

Perhaps now that a state has enacted such a law (although local governments still need to create the funds), Congress or the IRS will step in to let us all know if this works. While similar state tax credit funds have been around for a while, the state credit amount is usually lower. The problem is that if the "donor" gets a big benefit from the donation, was it really a charitable donation?

Other versions of this type of proposal are at the state level, such as California SB 227 which creates the California Excellence Fund. Donors get an 85% state tax credit. SB 227 passed in the Senate on 1/30/18 and is awaiting attention in the Assembly.

But California has one more proposal - AB 1485. This proposal has limited effect compared to other bills. This bill allows a 100% credit against an individual’s California income tax for a contribution to a charity located in California. The credit maximum is $500 ($1,000 for MFJ). No California deduction is allowed for the contribution. The stated goal is “to ensure California creates a robust and efficient tax incentive program that encourages all Californians to contribute to the charitable organizations serving their communities, coupled with accountability and transparency measures. Towards this end, California’s tax credit for charitable donations ensures that California taxpayers receive the maximum possible economic return on their investment and creates overall positive and sustained economic impacts for the entire state.” The bill’s effectiveness is to be judged by the number of taxpayers who claim the credit.

Critique: Unlike other proposals, such as SB 227, AB 1485 has a dollar limit. Also, the purpose might not be realistic because while for California tax purposes, the donor comes out even, if the individual does not itemize for federal purposes, there is no federal tax benefit of the donation. If the donor does claim a federal deduction, it's a great expenditure for the taxpayer because the benefit exceeds the cash outlay. For example, if the donor is in the 32% federal bracket and donates $1,000 (MFJ), they save $1,000 of California taxes and $320 of federal taxes - all for a $1,000 outlay!

AB 1485 provides a benefit to California taxpayers who do not itemize as they will get a tax benefit for their contribution (if to the right organization). 

How does the state pay for the likely high cost of AB 1485? Seems they will have to cut costs such as for social programs and perhaps even education. Will the donations go to charities that will make up for these cuts? I don't think so. Some of the donations will likely go to churches and public (and private) schools as they are clearly located in California. More of the donations will be make by higher income individuals as they have the money for the donations. Basically, AB 1485 allows taxpayers to use their tax dollars to decide which charity or cause to support rather than elected officials deciding where those tax dollars are needed.

The FTB likely needs to define what it means to be a charity located in California and how a donor can tell (such as distinguishing a PO Box from an actual location). Also, why not say that the charity has to provide a certain portion of its benefits to Californians (or that is qualifies for a property tax exemption in California since the charity could note that on its website and the FTB can verify that). Clarification is needed on whether a charitable contribution deduction continues for donations above $500 ($1,000 if MFJ).

Will these provisions work? What if individuals use them and then Congress or the IRS says no? I don't think it is a problem for AB 1485 as the donations are clearly to charities (although that can include governments). SB 227 which finds the General Fund is a bigger concern. It is basically replacing tax payments with "donations". It donations to the state fund are not enough, it won't affect government operations as they will still have tax dollars to meet budget needs.

What do you think?

Are California taxes high?

California State Sales Tax Rate Breakdown. Most cities also have sales tax making the total rate higher,
such as 9.25% in San Jose.

Are California's taxes high? I was asked this question recently by a reporter with Politifact California. Assemblymember Travis Allen who is running for governor had stated that California had the highest taxes. His website says that California has the highest personal income tax and state sales tax rates. [Chris Nichols article of 7/11/17]

If just looking at the rate structure, those are correct statements. The Federation of Tax Administrators posts helpful and current tables of the PIT and sales tax rates among the states.

So far as the California personal income tax though, less than 5% of individuals are at the highest rate of 13.3%. Many Californians owe little or no state income tax because the exemptions in California are fairly high.

But, everyone pays the sales tax, directly and indirectly.

When a state has high tax rates, it is due to two possible reasons (and perhaps both at the same time):

1. A narrow tax base
2. Lots of spending

A narrow tax base is certainly the reason for California's high sales tax rate. We only tax tangible personal property and then not even all of that. We tax almost no personal services, entertainment or digital goods. This also makes the tax system inequitable, non-neutral and inefficient because the exempt consumption tends to be that of higher income individuals.

What do you think?

Employer EITC Notice to Employees - New California Requirement!

Several states require employers to notify employees that they may be eligible for the federal (and perhaps also state) Earned Income Tax Credit (EITC). This year, California law was changed to require employers to also notify employees about the California EITC recently added to the law.

AB 1847 (Chapter 294, 9/12/16) – Expands the current employee notification requirement for the federal EITC to also include the California EITC, effective after 2016. Per the introduction to AB 1847: “This bill would require those same employers currently required to notify employees who may be eligible for the federal earned income tax credit to also notify these employees that they may be eligible for the California Earned Income Tax Credit under the same conditions.”

Amends R&T 19853, including as follows:

 (a) An employer shall notify all employees that they may be eligible for the federal and the California EITC within one week before or after, or at the same time, that the employer provides an annual wage summary, including, but not limited to, a Form W-2 or a Form 1099, to any employee. …

R&T 19854:

 (a) The notice furnished to employees regarding the availability of the federal and the California EITC shall state as follows:

BASED ON YOUR ANNUAL EARNINGS, YOU MAY BE ELIGIBLE TO RECEIVE THE EARNED INCOME TAX CREDIT FROM THE FEDERAL GOVERNMENT (FEDERAL EITC). THE FEDERAL EITC IS A REFUNDABLE FEDERAL INCOME TAX CREDIT FOR LOW-INCOME WORKING INDIVIDUALS AND FAMILIES. THE FEDERAL EITC HAS NO EFFECT ON CERTAIN WELFARE BENEFITS. IN MOST CASES, FEDERAL EITC PAYMENTS WILL NOT BE USED TO DETERMINE ELIGIBILITY FOR MEDICAID, SUPPLEMENTAL SECURITY INCOME, FOOD STAMPS, LOW-INCOME HOUSING, OR MOST TEMPORARY ASSISTANCE FOR NEEDY FAMILIES PAYMENTS. EVEN IF YOU DO NOT OWE FEDERAL TAXES, YOU MUST FILE A FEDERAL TAX RETURN TO RECEIVE THE FEDERAL EITC. BE SURE TO FILL OUT THE FEDERAL EITC FORM IN THE FEDERAL INCOME TAX RETURN BOOKLET. FOR INFORMATION REGARDING YOUR ELIGIBILITY TO RECEIVE THE FEDERAL EITC, INCLUDING INFORMATION ON HOW TO OBTAIN THE IRS NOTICE 797 OR ANY OTHER NECESSARY FORMS AND INSTRUCTIONS, CONTACT THE INTERNAL REVENUE SERVICE BY CALLING 1-800-829-3676 OR THROUGH ITS WEB SITE AT WWW.IRS.GOV.

YOU ALSO MAY BE ELIGIBLE TO RECEIVE THE CALIFORNIA EARNED INCOME TAX CREDIT (CALIFORNIA EITC) STARTING WITH THE CALENDAR YEAR 2015 TAX YEAR. THE CALIFORNIA EITC IS A REFUNDABLE STATE INCOME TAX CREDIT FOR LOW-INCOME WORKING INDIVIDUALS AND FAMILIES. THE CALIFORNIA EITC IS TREATED IN THE SAME MANNER AS THE FEDERAL EITC AND GENERALLY WILL NOT BE USED TO DETERMINE ELIGIBILITY FOR WELFARE BENEFITS UNDER CALIFORNIA LAW. TO CLAIM THE CALIFORNIA EITC, EVEN IF YOU DO NOT OWE CALIFORNIA TAXES, YOU MUST FILE A CALIFORNIA INCOME TAX RETURN AND COMPLETE AND ATTACH THE CALIFORNIA EITC FORM (FTB 3514). FOR INFORMATION ON THE AVAILABILITY OF THE CREDIT, ELIGIBILITY REQUIREMENTS, AND HOW TO OBTAIN THE NECESSARY CALIFORNIA FORMS AND GET HELP FILING, CONTACT THE FRANCHISE TAX BOARD AT 1-800-852-5711 OR THROUGH ITS WEB SITE AT WWW.FTB.CA.GOV.

Thus, AB 1847 modifies the required notice about the federal EITC and adds the information about the California EITC.

Effective 1/1/17.

Also see:

• EDD information on notice (not updated for AB 1847 (as of 12/12/16).
•  FTB website about the EITC with link to brochure and poster.
• FTB FAQs on EITC.
• FTB Analysis of AB 1847.
• California EITC brochure.
• IRS Notice 797 on EITC.

x  What do you think?